The Rhetoric of Reaction: the Tobin tax

Albert Hirschman has written a classic with The Rhetoric of Reaction – Perversity, Futility, Jeopardy. He summarizes dissent with a policy proposal in three classes: perversity, futility and jeopardy. As the book says, this is only about the rhetoric of reaction, not about the validity of the arguments. I therefore do not guarantee for the quality of the following arguments (because that is not the point here). Here is a short sketch:

Perversity – nice policy proposal, but you will achieve the opposite. An example in the book is the French Revolution. Giving freedom and the vote to the masses might sound like a good idea, but you will make everything worse – much worse.

Futility – nice policy proposal, but you will achieve nothing. The Welfare State is an example, which is a nice idea but in the end the middle class will benefit and the poor will continue to suffer.

Jeopardy – nice policy proposal, and you will achieve your goal, but some other, more important goal will be compromised. Here, democracy is an example, which compromises liberty if the majority votes to issue taxes on the wealthy.

Now that the rhetoric of reaction has been exposed, let us have a look at the Tobin tax. Since it has been a main pillar of alter-globalization group Attac, let us have look at their idea of a Tobin text (the original was proposed for foreign currency spot transactions only):

Thus international financial institutions and the major media (whose owners are often beneficiaries of globalization) have been silent about the proposal of the American economist and Nobel Laureate James Tobin, to tax speculative transactions on currency markets. Even at the particularly low rate of 0.1%, the Tobin Tax would bring in close to $100 billion every year. Collected for the most part by industrialized countries, where the principal financial markets are located, this money could be used to help struggle against inequalities, to promote education and public health in poor countries, and for food security and sustainable development. Such a measure fits with a clearly antispeculative perspective. It would sustain a logic of resistance, restore maneuvering room to citizens and national governments, and, most of all, would mean that political, rather than financial considerations are returning to the fore.

Now let me stress again that I am not interested in the validity of the arguments – both pro and contra – but in the form of the arguments contra. This should allow to give more structure to any discussion of the arguments against a Tobin tax and any reveal inconsistencies in these. I will through the three classes of arguments one by one.

Perversity (achieve the opposite) – There is a paper by Aliber et al. (2003) in the European Finance Review that is titled Some Evidence that a Tobin Tax on Foreign Exchange Transactions May Increase Volatility. Here is the end of the introduction (p. 482):

Using regression analysis, we document that volatility is positively associated with the level of transactions costs and that volume is negatively associated with the level of transactions costs. Thus our results are consistent with the notion that an increase in transactions costs does indeed lead to a reduction in volume of trading as one might expect, but its effect on volatility is exactly opposite of what proponents of Tobin tax would have liked to see.

Futility (achieve nothing) – This is probably the most common argument against a Tobin tax. It is often argued that financial companies will move its operations elsewhere, exploiting regulatory arbitrage. Here is British Prime Minister David Cameron at the Guardian (November 2011):

Cameron said: “The danger, we have always believed, is driving transactions to a jurisdiction where it wouldn’t be applied. So a global tax would be a good thing, but in Britain also we have put in place stamp duty on share transactions, a bank levy. We believe we are asking the financial services to make a fair and proper contribution to rebuilding our economy, to bring down our debts and our deficits. I think it is right in all countries to make sure that they do that.”

Jeopardy (something more important is lost) – This is also quite common. The Telegraph had this to say in January 2012:

When these factors are taken into account, E&Y calculates that the financial transaction tax could leave a €116bn hole in the region’s public finances, representing 1.2pc of the €9.8 trillion in public tax revenues that the European Union generated in 2010.

Marie Diron, economic advisor to E&Y, said: “The Commission’s figures in the impact study are not misleading – they do clearly outline where they have made assumptions and what they have left out of the calculations, but the publicised €37bn revenue figure definitely masks the true effect of the tax on EU public finances.”

In the process of writing this piece I discovered that I was not the only one with the idea of cross-checking arguments against the Tobin tax with the structure presented by Albert Hirschman. Maria Hedlund from the University of Lund, Sweden, has published on the same topic some years ago. (It seems that the text is not available online and was published in Swedish.)